Our view: We are reiterating our Outperform rating and believe that the company is executing well on its capital plan. Since the company's 5-year capital plan is front-end loaded (~45% in 2021), we believe management has the capacity to take on more growth opportunities, including a potential acquisition of a regulated utility with significant coal- fired generation assets.
Key points:
Successfully greening the fleet in several regions. Algonquin completed procuring 600 MW of wind facilities at its Missouri utility in H1/21, and retired the utility's 200 MW Asbury coal-fired facility in March 2020 (15 years ahead of its original retirement schedule). In California, the company has been adding solar facilities at its CalPeco utility, and going forward, management has plans to green Bermuda's generation fleet.
Could greening Kentucky be next? During the earnings call, management received questions regarding the company's potential interest in the strategic review process that American Electric Power (covered by RBC Capital Markets, LLC analyst Shelby Tucker) is running with respect to its Kentucky Power business. Management would not comment on specific transactions, but highlighted that they would take a hard look at opportunities where they can utilize greening the fleet initiatives. Based on information from American Electric Power's website, Kentucky Power has a rate base of ~$1.9 billion (31% related to coal) at the end of 2020, and coal makes up 74% of the generation mix.
Large increases sought in pending rate cases. As we previously highlighted, the company has a pending rate review at Empire (Missouri) requesting an $80 million rate increase, consisting of $50 million (7.6% increase) for the base business and $30 million related to the February extreme weather event, which will be revised down to reflect legislation that was recently passed to enable the securitization of the costs. At the CalPeco utility in California, the company is requesting ~$36 million of additional revenues, reflecting a 31% increase. Management indicated that the rate increase is required to address the expanding scope of work needed to manage wildfire risk, and the additional cost is split roughly 50/50 between operating costs and capital investments.
Reiterating EPS guidance. Management remains comfortable with its Adjusted EPS guidance of $0.71-$0.76, and indicated that although the guidance assumes that the New York American Water acquisition closes in Q4/21, a further delay would not materially impact 2021 EPS.
Tweaking estimates. We have left our 2021 Adjusted EPS forecast unchanged at $0.73, as the higher-than-expected Q2/21 results are offset by our assumption of a delay in the completion of the New York American Water acquisition until 2021 year-end. We have reduced our 2022 Adjusted EPS forecast to $0.82 (from $0.84), to reflect our forecast of higher shares outstanding